Printing Process Inputs -- Consumables: A Mixed Bag

Today, paper companies are taking downtime in an attempt to manage inventories, rather than trying to continue to run mills at as close to 100 percent capacity as possible to lower their total costs, the analyst explains. Papermaking is such a capital-intensive business, that in previous downturns, companies would maintain production to spread out their fixed overhead and, thereby, create sharp increases in inventories that lead to severe price declines.

Paper import levels can rise or fall fairly rapidly in response to changes in the value of the U.S. dollar, absent any trade barriers, Zaret says. This makes the exchange rate key to the industry’s health. “At the current dollar level, I’m not looking for a huge increase in paper imports,” he adds.

Looking at the paper market from the buyer’s perspective, Alex Brown, founder of Printmark Corp., an East Montpelier, VT-based consultancy to magazine publishers that specializes in manufacturing and distribution, has come to a similar conclusion regarding the outlook for 2009. “Prices will go down, but I don’t think they are going to plunge,” she says.

Little Demand for Supply

Economic conditions would seem to argue for bigger declines than the ones paper buyers will see because of the counterbalancing force of mills taking downtime, Brown explains. “Mills are going to take downtime rather than try to use lower prices to spur continued cash flow.”

The simple fact is that demand isn’t there, she notes. Lower paper prices cannot bring magazine publishers and catalogers back to life, and there are economic and market forces putting pressure on demand that paper prices can’t offset, she says. “I am especially concerned about the potential loss of titles.”

There are complexities to the question of what the outlook for paper demand will be from the magazines and catalogs that do continue to be printed, the industry consultant continues. “To me, the interesting factor is where those companies will fall along the spectrum of invest or economize.”